Insuring the lumber industry: What agents and brokers need to know

It’s arguably one of the oldest industries out there. People have been turning trees into valuable wood products since civilization began. Yet the lumber industry has endured through changes in building materials and construction — so it’s no surprise that insurers long ago spotted an opportunity to cover the lumber industry, historically subject to serious fire losses.

In the 19th century, a few insurance companies (such as my company, Pennsylvania Lumbermens Mutual Insurance Company) were formed by lumbermen, for lumbermen because the owners of lumberyards felt that stock-held insurance companies didn’t understand the lumber business and were either overcharging for coverage or didn’t provide insurance coverage at all. Furthermore, these insurance companies didn’t have the deep understanding of the risks and challenges that are specific to lumber-related operations and the long-term view and focus that is needed to provide property & casualty insurance coverage for these types of risks. Thus, the mutual lumber insurance niche was created and, over the decades, grew to serve the lumber, woodworking and building material industries.

Although much has changed, the fundamental issues related to insuring lumber, woodworking and building material industries have not. Proactive loss prevention and industry expertise remain critical to insuring businesses in the “lumber niche.”

Understanding the niche

For underwriting, rating and loss prevention purposes, the lumber niche may be segmented into three broad categories: primary wood manufacturing, secondary wood manufacturing and building material dealers (retail/wholesale distribution). Some examples of the types of business that would fall into the definition of primary wood manufacturing could include sawmills, veneer mills, pallet operations and more. Essentially, anything that starts with the processing and cutting of logs could fall into this segment.

The secondary manufacturing segment might include an array of wood-related manufacturing from furniture, flooring, doors and windows, to kitchen cabinets, just to name a few. The building material dealers segment usually includes both wholesale and retail distributors of building products, including pro-dealer yards that serve professional builders and contractors, as well as the local lumberyards and hardware stores that serve retail customers.

Major risks to this niche range from catastrophic fires to loading/unloading to slips and falls. However, the wood niche also has some significant commercial auto exposures, which is currently of pressing concern. Many building material dealers and manufacturers have larger fleets of trucks ranging from flatbeds to large semi-tractor trailers. In addition, the loading and unloading of these trucks in the yard is a major risk management issue, with frequent accidents involving forklifts resulting in property losses and bodily injury.

Side view of flatbed truck with logs

Transporting lumber raises driver safety concerns and commercial auto issues. (Photo: Shutterstock)

Loss control for wood-related businesses

It is absolutely imperative that insurers and business owners focus on safety in order to maintain long-term and sustainable profitability. In the lumber niche, many effective loss-prevention recommendations can be process-oriented, such as creating maintenance logs and checklists that don’t require business owners to make a capital investment. For example, to prevent fire in the primary manufacturing segment, business owners should develop and implement a formal, written safety plan that includes the following:

A housekeeping program to address combustible dust that accumulates on surfaces
An electrical maintenance program to prevent failures with electrical systems that includes an infrared thermography scan annually
A machinery preventive maintenance program to prevent equipment breakdowns
An emergency response program that includes the fire department visiting on an annual basis
A hot-work permit program to address fire risk during hot-work operations, such as welding
A disaster recovery program to minimize the time necessary to recover

Minimize commercial auto losses

In order to mitigate commercial auto losses, businesses can work with insurers to implement fleet safety programs that are documented, observable and actionable. Such a program starts with background checks, drug screening and physical exams, road testing, motor vehicle record checking, and other processes or technology for continual monitoring of drivers in the fleet.

For the building material dealer segment, simple loading and unloading checklists that include forklift guidelines can be highly effective. Some of the checklist items include the following:

All employees must use designated loading and unloading areas.
Drivers must use a designated safe zone during loading and unloading.
When loading, helpers must remain in sight of the forklift or crane operator.
Drivers must ensure that straps secure the load firmly before leaving the yard.
Before unloading, drivers or helpers must confirm that freight didn’t move while in transit.

Guidelines and checklists also have a role in preventing slip-and-fall hazards inside retail stores and their parking lots.

Knowledge is key

The risks facing businesses in this niche are diverse, but an insurer who specializes in these industries can work with customers to help them reduce their risk exposures. Today, just as in the 19th century, there are some companies that insure a handful of businesses in a wood niche segment, but they do not necessarily specialize in any lumber-related industry segment. These insurance companies may come and go as the severe nature of the losses typical in this niche are realized.

As a broker, you can best serve your clients by helping them partner with an insurer that has a deep understanding of the risks and challenges specific to lumber operations. And, at its core, the sole purpose of the organization must be to provide an unrelenting focus on what is needed to protect, serve and provide a consistent and long-term insurance market for the lumber niche.

Steve Firko is senior vice president, field operations at Pennsylvania Lumbermens Mutual Insurance Company. He can be reached at [email protected].

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